D. AZ Seal.jpgCo-authored by Howard M. Wexler and Robert S. Whitman

In wage-and-hour cases, the method of calculating potential damages is often just as (if not more) important as the underlying misclassification determination.  Since at least the 1940s, the U.S. Department of Labor has consistently taken the position that, where the employer and misclassified employees have a “clear mutual understanding” that their weekly salary compensated them for all hours worked, they are only entitled to “overtime” damages calculated at one-half their regular rate of pay.  The regular rate of pay is based on a mathematical formula and is determined by dividing the salary by the number of hours worked in a particular workweek.  

As recently as 2009, the DOL approved the method of calculation, ruling that the “clear mutual understanding” requirement does not need to be expressed in writing but is satisfied when an employee continues to work and accept payment of a salary for all hours of work.  Every federal Court of Appeals to have directly addressed the issue — –the 1st, 4th, 5th, 7th and 10th Circuits – has endorsed the half-time method of calculating back wages in misclassification cases.     

Despite this judicial and regulatory acceptance, a recent decision from the U.S. District Court for the District of Arizona takes the opposite approach.  In Blotzer v. L-3 Commc’ns Corp. (D. Ariz. Dec. 6, 2012), Judge Jennifer G. Zipps, after holding that the plaintiffs were misclassified as exempt from overtime, – rejected L-3’s contention that any damage awards should be calculated under the FWW method because, she said, it conflicts with the “rationale and intent of the FLSA.”

In reaching her decision, Judge Zipps applied a Department of Labor regulation used when employees receive a fixed salary for all hours worked:  the “half-time” or “fluctuating workweek” (“FWW”) method.  The FWW method allows employers to pay a fixed salary that is meant to cover all hours worked in a given workweek.  29 U.S.C. § 778.114.  Overtime is then owed for any hours worked over 40, based on a “sliding” rate scale at least at a half-time rate.

The following conditions must be met in order to use the FWW method:

  1. the employee’s hours must fluctuate from week-to-week;
  2. the employee must receive a fixed salary that does not vary with the number of hours worked during the week (excluding overtime payments);
  3. the fixed salary must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage;
  4. the employer and employee must share a “clear and mutual understanding” that the employer will pay the fixed salary regardless of the number of hours worked; and
  5. the employee must receive overtime compensation for hours worked in excess of forty, not less than one-half the rate of pay.

29 C.F.R. § 778.114(a).

Judge Zipps held that application of the FWW method in misclassification cases is inappropriate because in such cases, there can be no “clear mutual understanding” about a fixed salary for fluctuating employee hours – a precondition of the FWW method.  “When an employee is erroneously classified as exempt and illegally being deprived of overtime pay, neither the fourth (a clear mutual understanding) nor fifth (receipt of overtime compensation for hours worked in excess of forty) legal prerequisites for use of the FWW method is satisfied.”

The courts that have approved the FWW method in misclassification cases have rejected this narrow view of the “clear and unmistakable” requirement, echoing instead the long-held DOL position and holding that the requisite understanding is established when the employer and employee agree that the employee will be paid a salary for all hours worked.  It is also worth noting that the Seventh Circuit expressly rejected the FWW method as the basis for calculating back wages in misclassification cases, but nevertheless applied a half-time method, finding the calculation to be rooted in the Supreme Court’s 1942 decision of Overnight Motor Transportation Co. v. Missel

Despite the fact that many courts have adopted the FWW method in misclassification cases, thereby limiting employer’s potential exposure for overtime damages to half-time, there will continue to be outliers.  Because there is no circuit split, it is unclear when or whether the method will be expressly approved by the Supreme Court.  In the meantime, employers should continue to advocate forcefully for application of the method and oppose plaintiffs’ arguments that salary paid to exempt employees (even those later deemed to have been misclassified) was not intended to compensate for all hours worked.